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Family Business

MODULE 5

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Definition- Family business It is defined in terms when there is

ownership control by members of a family,

strategic influence of a family in the

management of the firm, concern for family

relationship and the dream continuity across

generations. Family firm is a corporation that is entirely

owned and managed by the member of a

single family.

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Another definition A business in which one or more members of one or

more families have a significant ownership interestand significant commitments towards the business.

In some countries, many of the largest publicly listedfirms world wide are FAMILY OWNED

Examples-Wal-Mart (USA), The Gap (USA),

-Samsung group(South Korea)

-LOreal ( France), IKEA (Sweden)

-Tata Group ( India), Mc Cain Foods ( Canada)

-Fiat Group ( Italy), Grupo Modelo ( Mexico)

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Characteristics of Family businesses in India

FB are loyal to the principles and ideals of the founder.

Family relationship is the most imp factor in

determination of the position a person holds in the

business.

Family influences the business and business environmentinfluences the family.

Family members who are not contributing to the

business are also included in the board of directors.

It provides true reflection of the values of their foundersand of the people who pass them on from generation to

generation.

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Contd

Succession is the final test for family business. Most of the family businesses face unique

management challenges because of the differences

in attitudes and aspirations of the family. It has

been observed that just 13 % of the family

business survive till 3rd generation and only 4 %

go beyond 4th generation.

The single minded dedication of the CEO and thefamily ensures that the family- owned business

survives through the toughest times.

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Importance of Family Business

FB are the engines that drive socio-economic

development and wealth creation around the world.

FBs are centuries old and have consistentlycontributed towards significant wealth creation andnation building.

FB contribute all over the globe more than half ofthe GDP, employment and account for a bigproportion of market capitalization.

FB not only contribute to the economicdevelopment but also in Philanthropy like inseveral areas- Education, Environment, Health ,Culture, Welfare of victims of Natural Calamities

and Heritage Conservation.

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Estimates show the following facts about

contribution of family businesses

About 85% of businesses in European Union & 90%of US businesses are family controlled.

Worldwide family businesses account for approx75% of the top 100 companies.

In Holland, small family businesses represent 75% ofall companies.

In US FB generate 60% of all employment.

Of Italys top 100 companies 43 are family owned. In India 95% of the registered firms are FB which

include Tatas , Birlas , Ambanis, Singhanias,

Chidambrams, Kirloskars , Goenkas etc.

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Characteristics of family firms and professional firms

1. Types of Market- Professional firms(PF) perform very well in emerging

markets than Family firms.2. Age of the firm- Family firms are younger or middle aged while PF are older.

3. Size of the firm- Family firms are smaller or medium sized but PF are

comparatively larger in size.

4. Category of entrepreneurship- The first generation firms accounted for 80% of

family firms,1/3rd were professional firms and 10% were foreign firms.

5. Ownership of firms- 61% of all firms were closely held by families, 32%

widely held and 8% were foreign equity owned.

6. Legal ownership- Very large number of family firms were privately owned

whereas the PFs were public limited.

7. Consistency of sales growth- 64% Professional firms had consistent salesgrowth of over 20% for last 3 years and remaining skewed towards the family

firm.

8. Group affliation of the firm- Predominantly professional firms were affiliates

of Indian business group or foreign subsidiary, while family firms more often

stand alone companies even though they have multiple businesses.

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Types of family business

Sole proprietorship

Partnerships

Limited Liability company

Holding companiesFamily controlled companies

Various forms of ownership can be-

Sole proprietorship Partnership

Joint stock company

Co-0perative organization

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Sole Proprietorship The individual form of business

organisation is an organisation at the head

which stands an individual as the one who

is responsible who directs its operations and

he alone runs the risk of failure.

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Features of Sole Proprietorship Individual ownership.

Unlimited liabilities.

Free from legal formalities.

Limited scope of operation.

Personal Interest.

Freedom to start and to end. Monopoly on profit.

Business Secrecy.

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Merits of Sole Proprietorship Easy formation.

Less expensive to establish.

Least government interference. Complete control.

Prompt decision.

Business Secrets

Feasibility.

Tax benefits.

Retention of profits.

Personal interest.

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Demerits of sole Proprietorship Limited resources.

Unlimited liability.

Possibilities of wrong decisions.

Limited ability.

Lack of specialization. Uncertain existence.

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Suitability of sole Proprietorship It is the best form of ownership in the

following cases.

1. Where business is on small scale.

2. Where capital requirement is very small.

3. Where promptness of decisions is very

important.4. Where customers demand personal

attention.

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Partnership As per Indian partnership act of 1932.

Partnership is a relationship between who

have agreed to share the profits of a

business carried on by all or any of them

acting for all.

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Features Plurality of persons.

Contractual Relationship.

Existence of business.

Profit Motive.

PrincipalAgent Relationship.

Unlimited liability. Restriction on transfer of interest.

Implied Agency.

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Merit of Partnership Easy formation.

More financial resources.

Collective decision making.

Sharing of risk.

Flexibility.

Complementary skills. CreditWorthiness.

Business Secrecy.

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Demerit of Partnership Unlimited liability.

Uncertain existence.

Limited funds.

Transfer of share.

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Suitability It is more appropriate if the business is of

medium scale. It is suitable in the followingcases.

1. Where financial requirement is moderate.

2. When business need persons withcomplementary skill.

3. Where business is to be carried on a medium

scale.4. Where collective decissions are required to be

taken.

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Joint Stock company A company is an artificial person created

by law having a separate entity with a

perpetual succession and a common seal.

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Features An artificial person created by law.

Separate legal entity.

Perpetual succession.

Common Seal.

Limited liability.

Representative management. Right to sue.

Transferability of shares.

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Merits of Joint Stock Company Limited Liability.

Diffused Risk.

More financial resources.

Transferability of ownership.

Perpetual Existence.

Economies of Scale. Professional Management.

Capital formation.

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Demerits of Joint Stock company Difficulties in formation.

Lack of personal interest.

Difficult to maintain business secrets.

Delay in decision making an execution.

Excessive regulations.

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Suitability of joint stock company It is suitable for large scale org and the

following cases :-

1. When financial requirement is more or businessis to be carried on a very large scale.

2. When project is very risky and promoters are not

prepared to bear the risk.

3. Where due to nature of business professional

management is needed.

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Co-operative organization According to cooperative society Act 1912.

Cooperative org is a society which has as its

objectives in promotion of the interest of itsmembers in accordance with the principles of

cooperation.

It is a voluntary association of individuals who

join together on basis of equity for the promotionof their common economic or business interest.

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Features Voluntary association.

Democratic management.

Service motive.

Open membership.

Government Control. Limited liability.

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Merits of Cooperative org Economy in Cost.

Democratic Management.

Service motive.

Government Regulations.

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Demerits of cooperative org Limited financial resources.

Political interference.

Lack of personal interest.

Lack of professional management.

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Suitability Where members individually are not in a

position to safeguard their interests.

Where there is willingness amongst

members to come together for the

promotion of their common interests.

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Impact of family owned business (FOB)

Let us analyse the reasons for disappearance of most of family owned

businesses in 2nd or 3rd generation. Sole Proprietor as owners have little trust in anyone elses ability

to make decisions.

They dominate their children and other members of the family inthe same manner as they dominate someone else.

Proprietor dominate their children and keep power in their ownhands which deteriorates their relationships as they becomedependent and submissive.

Family business under a control of Proprietor are hardlyprofessionalized.

Sibling rivalry and dispute resolution. Estate planning and succession planning.

Clashes and differences between different generations.

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Ten success principles for improving

family business performance

1. Communication Most families with an intentionto perpetuate their business follow this principle.They make conscious efforts to communicate with

their kin as stake holders in the business as silenceleaves room for different interpretation by others.

2. Trust The fundamental factor that bonds anyrelationship is the trust members have in eachother. So they ensure complete transparency inwhat ever they do.

3. Codify conduct - Variation in attitudes behaviourand conduct among family members are often asource of friction. A set of guidelines should befollowed to avoid feud.

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4. Loose coupling Relationship often break up forwant of breathing space among different unitswithin a family. Business families should retain

their separate family and business identitiestherefore they ensure that they have enoughprivacy within their joint family system.

5.Handle money carefully There are many disputes

in business families which arise due to poormanagement of wealth. Money is a double edgedsword, if handled carefully it serves you, otherwiseit may leave you bleeding.

6. Professionalize the business- professionalization isan attitude. It helps in making business decisions,it functions irrespective of weather the business ismanaged by family members or by outsiders.

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7.Ownership clarity- Many families tend to get into

trouble for want of clarity about who owns how

much of what. While taxation is an one

reason/excuse to have cross holding by family

promoted investment organisations. A family level

holding company model is the best structure toaddress this challenge.

8.Retirement and Succession- They are like the two

sides of the same coin. Leaders who have spent alltheir life in business hesitate to retire, so they need

career counseling on weather they should remain

associated with the business or not.

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9. Groom early Business leaders should groom their

children to been good family member and business

people. Families need to plan and spend quality timewith children and tap outside resources appropriately

to groom their children with the right qualities.

10.Leadership - It is critical everywhere, especially it

is complex in family business. The leader should be

one with humidity as a value besides all other

qualities. Eldest is the best may not always stand true.They need to make a conscious choice to remain

together built their family wealth.

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